RBNZ ‘tightening cycle is very mature’: Orr
2021 $28.5m $1.37b $7.82
AUCKLAND: Reserve Bank governor Adrian Orr says the central bank’s tightening cycle is ‘‘very mature’’.
Speaking at a breakfast hosted by the Council of Trade Unions yesterday morning, Mr Orr noted the Reserve Bank (RBNZ) had been ‘‘renormalising’’ monetary policy for more than a year now.
‘‘We were noisy about it, because the more people have low inflation expectations, the easier it is to achieve low inflation expectations,’’ he said.
‘‘We believe we still have some work to do, but the good news is, because we’ve done so much already, the tightening cycle is very mature; it’s well advanced.
‘‘So, we’ve got a little bit more to do before we can drop to our normal happy place, which is to watch, worry and wait. With signs of inflation up or down, at the moment we still feel we’re too close to some sense of neutral.’’
The RBNZ is expected to hike the official cash rate by another 50 points, from 3% to 3.5%, when it next reviews monetary policy on October 5.
At its last review in August, the RBNZ forecast the official cash rate (OCR) peaking at 4% next year, and remaining at that level until 2024.
Annual consumer price inflation is still way out of the RBNZ’s 1%3% target range, at 7.3% in the June quarter.
However, the delay between the RBNZ changing the OCR and this feeding through into the economy, as people come to refix their debt for example, takes time.
Some economists, including those at ANZ and ASB, recently revised their OCR outlooks up, following data releases both here and abroad showing inflation being more stubborn than expected, and the US Federal Reserve chairman Jerome Powell talking tough on doing what it takes to kill inflation.
Other economists believe the economy won’t be able to handle interest rate hikes that are much more aggressive than that projected by the RBNZ.
Most see risks to the upside — inflation being more persistent — rather than inflation being less persistent.
The RBNZ was ‘‘well on course’’ to lowering inflation, Mr Orr said.
Tighter monetary policy was expected to slow economic demand to better match supply. However, building supply capacity in the economy would take the strain off monetary policy, he said.
Mr Orr also discussed the weak New Zealand dollar, which was trading at 56.4 US cents yesterday morning.
He noted the US’s Federal Reserve was continuing to tighten monetary conditions at pace.
‘‘What does that mean?
‘‘It means US interest rates are up . . . that makes a capital drain from the rest of the world back to the US, as money flows to where the highest yield is.
‘‘It also creates broader economic uncertainty; it generates volatility and concern that again reinforces the desire for people to have their capital back in the US — a perceived safe place as opposed to, effectively, the rest of the world.
‘‘Almost every currency in the world is declining against the US dollar as they look to disinflate along with the rest of us.’’ —